The pandemic caught most businesses off guard as it turned the world upside down. For many entrepreneurs, this wakeup call pointed directly to the concept of cash planning. The complications and responsibilities of running a business such as growth investments or unexpected changes – like a pandemic – have a direct impact on cash flow. If you aren’t prepared, things can get out of hand quickly.
Effective cash planning can help you avoid surprises (and we don’t just mean pandemics) that can quickly put you out of business or start you down the road of credit.
Cash Planning is More Than Just Checking Your Bank Balance
What is cash planning? Cash planning is the process of planning and controlling the use of your cash flow to ensure you are meeting not only your expenses, but also your profit and growth goals as well. Cash planning may be prepared on the daily, weekly, monthly or quarterly basis depending on your business’s needs.
When it comes to cash planning, the most important task is to set up a system that tracks your cash flow. Your system helps you become a more empowered business owner in control of your own fate because you begin to make your business decisions based on your business’s current reality, not just your gut instinct.
Learn the basics to consider when taking control of your business’s cash planning here. Know that the right Accounting Coach or Business Coach can help you streamline your cash planning process and get it set up to begin working for you.
Set Up an Effective Bookkeeping System
Even with a good product or service and a healthy profit margin, many companies go out of business because they don’t properly forecast cash flow. An effective system gives you the insight into your cash flow so you can accurately track what comes in and what goes out. The system begins to put together the pieces of the puzzle and gives you data to work with.
Many business owners’ current system includes simply looking at the bank account balance daily or even weekly. This basic system gives a snapshot of “today” or at least this moment, but will keep the business stuck in low gear because it does not take into account the expenses you have on the horizon. It is only focused on today’s survival.
You need to set up your bookkeeping system to give you insight into what you have now, what’s projected to come in, and what needs to go out.
Setting up the bookkeeping system is step one. From there, you’ll begin to be able to pull informative reports and know what they are telling you so you are proactively prepared to deal with inevitable surprises.
Understand the Importance Long-Term Cash Planning
A monthly cash view helps by comparing the projected revenues for the month to the anticipated expenses, allowing for timing differences to be adjusted for. Although much better than the daily bank account balance method, the monthly cash view limits the business growth based on that limited time. Any issues coming next month may not be noticed until then and the money that could have been helpful may already be spent on something less vital. This approach can allow emergencies to creep up and distract from your overall business goals.
The long-term cash planning process allows the business to have room to plan for future growth while minimizing day-to-day headaches. This takes some time and attention up front and a bit of maintenance ongoing, but the business can thrive with the proper planning in place. The regular updates and attention keep you on top of the cash situation. From there you know when trouble is on the horizon, while also seeing upward patterns that can provide capital to invest in your business’ growth.
A Business Coach can help determine what percentage of your cash is needed for expenses, how much you have available for investment and how much you can put toward products and services. The Business Coach will help you become the master of this by getting the training and structure to succeed.
Cash Flow Forecasting in Practice
With your bookkeeping system set up, you can now begin to forecast your cash flow. Real-time accounting allows you to track cash flow week-by-week or even day-by-day providing insight into your financial health. You are collecting your spending and sales history and can learn more about the ebbs and flows or your business. You can make accurate forecasts based on your cash flow allowing you to avoid overspending and ending up in a situation where you have to rely on credit.
The key is to set up your financial dashboard to ensure you can quickly access this important financial information and be able to understand what it’s telling you so you can act on it confidently to ensure you are keeping an eye on your long-term financial plan.
Schedule time into your day or week to build the habit of reviewing this information and spotting trends or opportunities within it.
Getting into the Details
Cash planning does more than just track your sales and expense data accumulating in your bookkeeping system. It allows you to explore factors such as product or service pricing, profit margins, packaging mixes, recurring revenue streams and similar elements of your business that can potentially help free up cash flow and strengthen your short term and long term outlook.
This process may seem arduous to some, but making even minor adjustments in these areas may end up having a profound impact. You must set aside time to review the details of your business from many different angles to get a better picture of how to improve cash planning.
When Can Debt Work for You?
Although being in debt is never the goal of a business, most everyone has experienced it at some time or another. With proper cash planning, sometimes it turns out a loan or credit can work in your favor. It might provide money you need upfront to help expand your product or services or enhance other aspects of your business.
With proper planning, using credit wisely can be an effective way to grow your business. If you earn ROI on the investment, the investment ends up repaying the loan and bringing in profit. But you need to know your numbers confidently to take advantage of this opportunity. Talk with your Business Coach about where this could be effective in your business.
Proper Cash Planning Can Improve Invoicing Practices
Following your cash flow you’ll begin to discover where processes may need revised to help relieve an ongoing cash flow problem. Invoicing procedure is a common one. Effective cash planning can help improve the efficiency of your invoicing practices in several key areas, including:
- Billing frequency
- Credit checks
- Automated payments
- Payment ahead of services
- Interest on late payments
- Online billing and payment systems
Sometimes an adjustment in your invoicing practices can resolve a recurring cash flow problem.
How a Business Coach or Accounting Coach Can Help
You are busy running your business. When will you find the time to set up or enhance your cash planning system as well? It may be time to invest in a Business Coach to help you set up your cash planning system and get it working for you.
Change your relationship with your cash flow through our Business Compass Program. We built this 12-month program to empower business owners to have clarity, confidence and control of all their business financial needs including cash planning.
Connect with us today for a free 30-minute introductory call to see if accounting and business coaching with the Business Compass Program is right for you.
Visit our Entrepreneur’s Guide to Accounting to learn more about how to grow your business through real-time accounting.
[…] Cash planning helps you set goals based on the cash resources available. Knowing when you are expecting more money, allows you to plan where to use that money – before it disappears into Accounts Payable. […]
[…] Many solid businesses have gone under because they decided they had to make financial adjustments to accommodate their customers. As soon as you start negotiating payment schedules, you leave yourself open for missed payments, delayed payments and a cash-flow shortage. […]
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I think the tone of voice on this blog is exceptional. If only everything was written this way. It is friendly, clean, easy to read, and inspiring. I liked how you mentioned the importance of a cash planning service that you get along with easily in order to improve working relationships and productivity. I think that it would be important to hire a Cash Planner that is properly qualified and experienced for the job. Thank you for all of the interesting and helpful information you provided.
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